reacquisition price and the net carrying amount of the debt is a gain (reacquisition price lower) or loss (reacquisition price greater). Notes Payable 19. (S.O. 6) The difference between current notes payable and long-term notes payable is the maturity date. Accounting for notes and bonds is quite similar. 20. Interest-bearing notes are treated the same as bonds a discount or premium is recognized if the stated rate is different than the effective rate. Zero-interest- bearing notes represent a discount on the note and the discount is amortized similar to the manner as discounts on interest-bearing notes. 21. When a debt instrument is exchanged for noncash consideration in a bargained transaction, the stated rate of interest is presumed fair unless: (a) no interest rate is stated, (b) the stated rate is unreasonable, or (c) the face amount of the debt instrument is materially different from the current cash price of the consideration or the current market value of the debt instrument. If the stated rate is determined to be inappropriate, an imputed interest rate must be used to establish the present value of the debt instrument. The imputed interest rate is used to establish the present value of the debt instrument by discounting, at that rate, all future payments on the debt instrument. 22. When an imputed interest rate is used for valuation purposes it will normally be at least equal to the rate at which the debtor can obtain financing of a similar nature from other sources at the date of the transaction. The object is to approximate the rate that would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions. 23. Mortgage notes are a common means of financing the acquisition of property, plant, and equipment in a proprietorship or partnership form of business organization. Normally, the title to specific property is pledged as security for a mortgage note. Points raise the effective interest rate above the stated rate. If a mortgage note is paid on an installment basis, the current installment should be classified as a current liability. 24. Because of unusually high, unstable interest rates and a tight money supply, the traditional fixed-rate mortgage has been partially supplanted with new and
unique mortgage arrangements. Variable-rate mortgages feature interest rates tied to changes in the fluctuating market rate of interest. Generally, variable-rate lenders adjust the interest rate at either one or three-year intervals. Off-Balance Sheet Financing 25. (S.O. 7) A significant issue in accounting today is the question of off-balance- sheet financing. Off-balance-sheet financing is an attempt to borrow monies in such a way that the obligations are not recorded. Off-balance-sheet financing can take many different forms. Some examples include (1) non-consolidated subsidiary, (2) a special purpose entity, and (3) operating leases.